Lead: Jesse Gourevitch
Counselor: Carolyn Kousky

Climate risks are not fully priced in housing markets. This can lead households to make uninformed decisions and create perverse incentives for development in high-risk areas. Unpriced climate risk could also cause sudden adjustments in home values when consumers’ perceptions of climate risks change, creating market instability. Mispriced climate risk in the housing market is symptomatic of several market failures, including imperfect and asymmetrical access to information about physical climate risk. To improve the economic efficiency of housing markets, state and federal governments have an important role to play in determining properties’ exposure to climate risk and communicating that risk to the market. In our paper, we discuss current trends in the provision of public and private climate risk information and highlight the need for more accessible and accurate governmental climate risk data. Requiring disclosures of properties’ exposure to climate-related hazards during real estate transactions are a particularly important tool for communicating risk to the market and reducing informational asymmetries between buyers and sellers. To better understand the implications of these requirements on residential sorting, we estimate the effects of flood disclosure laws on the race and income of homebuyers exposed to flood risk. Given a softening in demand for high-risk properties subject to disclosure, we expect that providing this information could result in lower-income households becoming more exposed to flood risk.